Guest Post: Is The Fed Funding The Treasury Through The Banks?

Fed balance sheet - Is the Fed funding the Treasury through the banks?

Recently I decided to take another look at the Fed's balance sheet, and while I am none too surprised, I must report that the Fed has printed approximately $200B from April 7th 2010 to June 30th 2010. What is interesting is *how* they went about doing it.

Here is the graph which shows this. The blue line represents the total increase in the size of the Fed balance sheet since September 10th 2008. The red line represents the marginal increase in the Fed balance sheet, net of 'Excess Reserves' held at banks but not yet loaned out, and net of Treasury sterilization:

Note that from November 2008 through April 2010, "Real Economy" printing was essentially the same. Sometimes it grew, but inevitably those periods were reversed. The Fed was clearly targeting that figure. Well, something changed as of April 7th 2010.

That date should ring a bell. It is almost exactly right after the end of the Fed printing programs, which finished up at the end of March. From their 3/16/2010 FOMC statement (FRB):

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month... In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

So as of March 31st 2010, all money printing programs and all special liquidity programs were over and done with, except for CMBS TALF. And yet the *very next week*, this new wave of net printing was allowed to hit the market, after such printing was held constant for 17 months. Hmm!

Given that those programs have all ended, the next logical question is how this net printing has come about. The chart below shows Total Fed Assets, the Treasury Supplemental Liquidity Program, and Excess Reserves in the banking system:

Below is another way of visualizing the Fed's balance sheet, splitting up assets into securities purchased outright by the Fed, versus liquidity measures:

Both have essentially gone flat.

What we see is that Bernanke has indeed stopped those programs for all intents and purposes. The net printing shown above has come through a decline in bank Excess Reserves. Whereas before such declines in Excess Reserves were met by Fed sterilization through a shrinkage of the Fed's own balance sheet (for example, see May - July 2009), nothing of the sort has happened this time. That money is just being allowed to enter the system, period.

The next logical question is where the bank lending that has replaced the Excess Reserves is heading. Well, we know it is not hitting the consumer debt market, given the latest Fed reports. Consumer credit has continued to shrink (ref), and the government is the only marginal lender (chart). And just ~20 days later, risk assets began falling hard. It seems doubtful that they are ramping up risky lending at a time like this.

My theory is that the money has floated into the Treasury market. A lot of people have wondered how the Treasury would be able to continue running record deficits without the Fed buying. Well, we now know that the banks are picking up a lot of slack in the lending markets, and they are doing so in the midst of very dicey market conditions. Is it that much of a stretch to posit that the Fed reached an agreement with them whereby the banks would take over where the Fed left off?

If this is true, Bernanke is talking a good game while continuing to dole out free booze. The guy is doing what Krugman is saying without openly acknowledging it. I am amazed that no one is talking about this!

Its not the Treasury's money. Its *our* money. This is part of the stealth wealth transfer to the banksters from the taxpayers.

Gubmint digs a deeper debthole, Fed prints, banksters borrow at zero, lend at low rates to gubmint earning the spread, while ultimately taxpayers are on the hook for the interest. Wealth flows from productive sector, taxpayers, to the vampiric leeches, the banksters.

This is part of the stealth wealth transfer to the banksters from the taxpayers.

Why are your thoughts limited to the banksters? The homeowner who was approached by a mortgage refinance company back in 2006 has no blame to shoulder?

In 2006 the refi company tells the homeowner that he currently has $200K in equity and he can get him $150K without a problem. Homeowner takes the cash and in 2009, defaults, strategically. Walks out and the mortgage company never hears from them again. After the foreclosure the bank get $45,000 for the house.

My comments are germaine to the article and yours are not. Nonetheless, I'll play out your hypothetical scenario.

Most all refi's are recourse, but subject to state law limitations. Get better skip-tracers. The defaulter has a SocSec#, its all over the loan docs. Track 'em down.

In your hypothetical situation, did the refi-co get the loan put back to them from Fannie/Freddie or the MBS manager?

If yes, responsibility and accountability. Who was rsponsible for originating the loan, the refi-co. If they made a bad loan due to bad due diligence in terms of the credit quality or in mis-assessing the impossibility of ever increasing home prices, then the refi-co should eat humble-pie in regards to the loss, if they can't obtain and enforce a judgement.

If no, why aren't Fannie/Freddie/MBS mgmt chasing the deadbeat?

If the refi was done non-recourse, the defaulter took advantage of a legal loophole. I don't like it, but the defaulter is within the law. Any finance company (refi-co, bank, Fannie/Freddie/MBS) that doesn't make strategic allocation for losses, fraud, etc., by Darwinian economic selection, should be out of business.

Federal Reserve Ponzi scheme to steal the wealth of an entire nation to benefit an industry of parasites is a crime magnitudes larger than your pitiful strawman situation.

You're living in the past, Dude! It's not your money, any more than it's your government!

Of course you hear a sucking sound! With the brief exception of the 40 or so years between the last great depression and 1980, it's always been so. The rich and powerful take what they want and their victims suffer what they must. Ronald Reagan understood this implicitly and believed it to be the basis of the natural ordering of society, thus putting this country back on the road to a medieval society. Figuratively speaking, you are a peon sharecropping on the baron's estate, and half of your production goes to him! There is literally zero difference now between life in America now and life in Medieval Europe, with the exception that today's peons have some small share of the vast wealth created in the 40 year period, by which they maintain the appearance of prosperity.

Make no mistake: That too shall fall victim to the predations of the wealthy and powerful, as the "middle class" digs into its inheritance in an attempt to maintain its standard of living.

The remedy to our dilemma is to place constraints on the accumulation of wealth and power, but this runs contrary to the exercise of power (thus the dilemma). The whole idea of unconstrained power is to dominate and exploit, thus extending itself ever wider.

It mystifies me that people do not get that; that they do not see through all the "free market" hype for what it really is: a ploy by the wealthy and powerful to avoid any constraints being placed on their continued expansion of wealth and power. The price of this mass delusion will be extreme -- the reduction of those masses to serfdom.

triangle of deception indeed. but why not skip the middle man (the federal reserve bank) and just have the u.s. gov print it's own money that is needed for the deficit. no borrowing, and thus save all that interest. anyone ???

And there's Santelli on CNBS ranting with glazed eyes and breathe about "how great the auction went this afternoon". Means GS et al stepped up to the plate and did their patriotic share. Tu comprend pukingly pathetique(accent grave).

It's a closed loop. They can survive as long as there's still political will to keep the show going.

As far as the Fed is concerned (if you imagine it as an entity rather than the a collection of individuals), the government and the major corporations are merely tools that can be disposed of once they have outlived their usefulness.

You can see it in England now. The "sacred" government built up over decades is being sloughed off with stunning alacrity.

Beginning that many are wondering where one can find 'news" these days. Certainly not the MSM whether press, radio or tv. So much of web based is so entirely biased, slanted, tainted, expostulating a specific point of view, a narrow agenda. This is becoming more than worrisome, as many conclude that the majority of news dissemination vehicles have or are in the process of being "compromised" in some manner.

Maybe the banks aren't meant to survive, at least not the ones who have leased all the gold. Who owns the fed exactly to the penny, and lets see and assay the gold. If ownership is spread out evenly through member banks with no single family, bank, corporation,or other entity having a heavily concentrated or controlling position, and there are 8300 and change tons of gold still physically stored and unencumbered, well I for one will shut up. I'm not the sharpest knife in the drawer but these guys (central bankers) had to know from the start that the fractional reserve system couldn't work forever from the start just because of the exponential growth needed for it to continue. Once they get everyone off the gold standard they've got it made, get governments spending and borrowing (easy as breathing) to the point where the politicians are so worried about how they come across and getting re-elected that they don't even worry about making the central bank tell how much money they have actually created 'for you', (M-3 reporting). With politicians bought and paid for (for the most part) and never the less on a very short time frame planning wise and with the central bank making banking rules and regs how hard is it to create a credit boom bust, roasting the banks who have leased all the gold over the years (central banks may have even started, bought, owned etc. these banks just for the purpose of leasing gold before going bankrupt). Why? So that when the 'leaders' get involved to try to fix things, then come the sovereign debt crises, and then come the currency crises. Once the currencies crises hit then the central banks knows for sure they will be audited, demonized and dismantled. The audit will show that most of the nations gold has been leased out to banks that no longer exist and never did return the 'borrowed gold'. At the same time a new currency or exchange medium is needed by the world that can be trusted in a no trust environment. Gold, silver, oil, or other commodities will be trusted and talked about but gold is the only one in the end that will work. Most countries will no longer trust mere polititions to create their money, or any central bank that can hide in the shadows,and most of the countries gold is gone, what to do? Then along comes the BIS or IMF or world bank or whatever saying 'we have x-amount of gold and will issue currency backed by gold (the gold that they stole while issueing the last worthless currencies). This is the only endgame I can think of for the way things are going. The central bank thing has to be a very sweet gig if you are on the inside, and it seems that it took a lot of planning and patience to set up (decades or more in the USA) worldwide. Massive power and influence (and intelligence) to set up across Europe and America when a meeting of minds involved days, weeks or more of travel. Quite an enterprise, old and established, to let come unravelled under leaders the likes of Timmy G, Ben B, G Brown,M King, Greenspan and Trichet. Yup, quite the group of deep thinkers and long timespan masterminds to be given reign by a group who planned and carried off such a thing before modern communication, and travel and have remained anonomous for almost a century and into the internet age (Clinton gets a blow-job and the world knows, but who really owns the private entities that print the worlds money). No, if the worlds central banking/currency system blows up it's on purpose, not because an engenious, patient evil empire got sloppy and dumb. And that (one world medium of exchange, based on gold, that you have stolen most of the worlds above ground stocks, and thus own), is the only end game (barring population control) I can come up with. If the gold is still there, and we can find out who owns the fed, before pitch-forks become the latest 'goin to town to vote' accessory, then maybe everything will work out? Nah. Sorry for so long of a post, have heard lots of theories and predictions about what can or could happen but not to many on why.

Who are the banks lending to? I see is continued pressure on corporations to reduce bank lines via the corporate debt markets. Consumer credit is declining. Mortgage lending is done by the Feds. Who are the banks lending to?

Given the banks are not marking to market it makes sense to me that the free Fed carry trade is the favored "lending" by banks.

Mainly to consumers for big ticket purchases like homes, cars and even appliances. No drop off at all. I see stricter underwriting, but if you have a good beacon score you can borrow. I also see small business loans being made. Again, stricter underwriting, but the loans ARE being made.

Facts backing up your claim would be of interest. Consumer credit is contracting. Banks aren't making many car loans; the Fedral Government is, (GMAC/ALLY). Small businesses widely complain of tight credit, while they wait for higher taxes in 6 months. You might have a unique view but I'd love some facts. -Best

That is just not true. I see it every day. BAC, WFC, Chase, Regions, and smaller regional banks are making car loans every single day. My office is right next to the F&I guy and I see it every single day. A customer came in today and just got approval for a loan to open two new Bojangles and a Subway Shop.

Rumors that credit is not available and banks are not loaning are just falsehoods spread by people with some sort of "interest" or macabre pleasure from propagating rumors of armageddon. I am telling you I am in the trenches and it just ain't happening.

Now, I am not saying that Monday it won't come to a screeching halt. Anything is possible and credit markets can lock up very quickly. But to say banks are not lending is a ball-faced lie.

Psquared,
It's happening within the constructs of the ZH website, to be sure. Do not rock this boat here my friend or they will send the cleaner to visit you.

Repeat after me: The credit market is frozen, the market is on the verge of collapse(s&p will trade down to 100), I love gold, CMBS is going bankrupt US investors, nobody's buying, Sovereign CDS implosion will bankrupt everyone else, I love gold.

Oh the smaller banks are still loaning- so long as they know you, your family, your livestock and you sign off your life for loan collateral. AND give blood during your oath to pay back on time. Me speaketh from recent experience. Known the bank for 13 years, have had 3 previous business loans all paid back on time and THIS time around the app/acceptance process was a whole new ballgame.

Yes, loans are being made, of course. But the facts are that the rate of lending is dropping like a rock. So, since you're likely 20ish, and just got your first job as a service rep at your local bank, making less that you would be flipping burgers, sure, you'll see loans being made. But 3 years ago, they were making 10 times the number of loans.

Psquared, defend yourself. How do we know that what you are seeing is high or low volume compared to the before time - or why?

BTW, I tried to refinance my house around January 2009, but no one would lend to me. Then around March 2009, I received much interest and effortlessly refinanced my house on very good terms, and then due to unusual circumstances, I effortlessly refinanced later in 2009 for even better terms. Then I got a business credit card (I'm an independent contractor with an LLC) with a high credit limit in spite of having several personal credit cards with high credit limits.

Now it is true that I do have an excellent credit score and no credit card debt, so perhaps the credit drop off simply reflects the elimination of high risk loans that should never have become ubiquitous in the before times, and perhaps it also reflects less buying of homes, cars, etc.

Consumer credit, revolving and non revolving is contracting drastically. State sales tax collections are contracting if corrected to show the state sales tax increases, property taxes same. I can believe that the top 5% of income earners/renteir class is still getting loans but not Joe 6P...Show me the numbers please.

Go back and read my posts. I never said consumer credit is not contracting. I simply said that anyone who makes the statement that banks are not lending is spreading a falsehood and I know it is false from personal and daily experience. I see it every day and I have been involved with lending from some angle for over 30 years.

Couple guys I went to school with work in loan departments of small local community banks. Both have said if you haven't gone in to get a loan yet it's not going to be happening. Both are worried to lose their jobs.

Yah, me too; I own this, like, big bank, y'know. And we back every piece of paper gold and silver with the real stuff, honest. So buy lots of GLD and SLV. And don't bother with delivery, it's just a pain...

Say what you want, but money/credit is flowing. Stricter underwriting for sure, but loans are being made. Now maybe loans are being paid off faster than new loans are being made, but money is being loaned to consumers who want it and who qualify.

Well, Jesus Christ, I wasn't implying there were LITERALLY zero loans are being made. Of course, banks are making zero risk loans to people that don't need the money and are willing to securitize it with collateral.

That would be a stretch as well. Banks are lending to people who can pay the money back and in some recent cases people with a marginal credit score. The days of easy credit and 100% financing with a wink and a nod are indeed over, but if you can show you have a job and can service the debt you can get a SBA loan, home mortgage or car loan. Sorry that does not comport with your view of reality, but those are the facts.

I try not to get wrapped up in these stupid tussles but come on now, the ad hominem attacks are giving your immaturity away.

Sure, believe whatever you wanna believe, gold is going to the moon and you'll be buying huge swaths of prime farmland for an ounce of it. good luck with that one.

The guy is trying to tell you what he's seeing and he said it could all come to a screeching halt monday. if you don't wanna hear it then keep reading without wasting bandwidth here. people like you wont hear a fucking thing because they already know it all.

Nobody is tussling over anything. I'm stating facts. Pollyanna is spouting some garbage based on what he percieves to 'see' daily in a loan department.

Consumer credit IS falling off a cliff. Unemployment IS at depressionary levels. Housing IS continuing it's decline. CRE IS already at a point-of-no-return. National debt levels are teetering on default. States and muncipalities ARE insolvent. Et al.

What's sad (and scary) is when I see obviously educated people searching for any tiny confirmation that they can find to substantiate a hopelessly rosy scenario. Bankers, for example, are terribly predictable at doing just that.

Or one out of the two. Need the money and are willing to give blood, gold dust and their first-born as collateral. wh/ was difficult for me as I have no first-born. But the banker has rights to all the papered horses, bulls and dogs. And the hay equipment. And a promise to check in once a week with good beer and well-seasoned elk jerky...OK, maybe not that. YET.

This does not suggest that credit is not being extended to credit worthy borrowers but instead suggests falling demand.

Lending standards have certainly tightened of late but still not enough. With a credit score of 700+, proof of stable income and 3% down, you are guaranteed to receive $100K's for an investment likely to wipe all equity away within months. That's more of a guarantee of failure than opening up two adjacent Starbucks's yet no one in their right mind (credit worthy) think either is a good idea these days.

People don't want to charge their vacations on a 29.99% Citibank mastercard? I agree, demand is falling like a stone and for good reason. Frankly, the entire mindset of consumerism America has changed. Being indebted and having 'stuff' isn't as hip as it was (which is sad in the first place). Everyone I personally know has made it a priority to pay off their debt (assuming they can) and not incur anymore.

I think, for those that can, walking away from this scam is now in vogue.

What I like best about you is that you're posting drivel on a chat board, so I know it's gotta be true. Keep at it. You'll have most here convinced that all the data is wrong and your personal 'situation' is actually the broader truth.

But, do the banks themselves meet applicable credit standards to borrow from the taxpayers? That's the problem. When you get an NSF notice from the bank, you have to check to see if it's because you didn't have money in your account of the bank didn't have money at all.

That is just a plain ball-faced lie. Why would you say something so egregiously false? It has everything to do with how much money you have in the bank and NOTHING to do with the banks solvency. What do you think FDIC insurance is for?

What is your stake in this that you would spread such a malicious lie?

I don't get NSF notices, because I don't overdraw my account, I'm subject to 100% reserve requirements. Its a pity the banks aren't also. IMO, no, the banks are insolvent. Carrying extend and pretend losses due to accounting rules gimickry is bull$hit.

I have tried 4 times to post an answer to this so I will be quick and may not edit.

Don the reader wrote this, not TD. I did not mean to insult anyone. What I did mean to be was stuck up and snooty about my superior knowledge of things because I read Zero Hedge, the best and most badassed blog on the net. If I committed a crime at all it would have been blatant, insufferable, arrogance.

QE 2.0 the covert edition. You are the only one to show it, most regulars here know the fed is holding up the 10/30 year. The only overt stimulus will be more free government checks sent out right before the election.

Wasn't there a time the Fed was "independent" and would have let the bond market discipline the politicians with markedly higher interest rates? If the Fed is completely in the pocket of the politicians, well, that bodes ill for price stability.

This seems to me a really excellent article in the finest tradition of ZH. It answers many of my questions posted elsewhere about how the Treasury can continue to float such gigantic amounts of debt. It also explains why the "bond vigilantes" have been kept in their box and will remain there. The fix is in for Treasuries: the Fed, one way or another, is making sure they will stay pinned to the ceiling.

How is anything changed since the Fed originally bought the MBS in the first place? Or are you showing that the Excess Reserves are now being spent on Treasuries at various maturities? In any case this isn't any "new" printing of money.

Caveat: I think it was ridiculous that they purchased the MBS in the first place.

The thing that makes no sense is how a bank can take a position in a treasury with a maturity of more than a couple of years and think they will not be killed by a rise in interest rates. Surely, no one is willing to issue CDS on a treasury for anything less than a huge premium to supplement that risk. Right?

I think regular QE increases the Fed balance sheet as they purchase UST, MBS etc. The hope is this money printing will have a multiplier effect on credit availability. To this point it has not worked as it has simply driven financial assets higher and banks are simply sitting on their excess reserves, (because they are basically still insolvent I think).

The Treasury funding issue is different, but related I think. The Fed claims QE is done for now. The Treasury has huge UST issuance needs. The Fed has pumped up bank reserves. The banks could have agreed to buy a lot of the UST supply post-QE1.

Seems like a ponzi scheme to me. Buy I am no monetary expert. I could have it wrong...

If the banks can't find borrowers with adequate collateral or growth prospects, the next best place to put their money is Treasuries.

How long is this viable, as both residential and commercial mortgage defaults are increasing, as are bankruptcies? Both of these will hurt banks, and they will need to keep their money for capital reserve. Will the FED just keep shoveling excess reserves to the banks?

I believe the point is that the "excess reserves" supposedly belong to the banks and are being parked in UST's yielding the spread.

More to the point is that credit worthy private borrowers aren't demanding credit and expanding the money base because they are reasonable and prudent enough to know that demand for anything is non existent. Everyone else always seem to have enough schemes on how to destroy credit but have no access to it due to their sub-prime status.

Can the FED keep the shell game going indefinitely by some new financial wizardry? Or are we close to the final chapter in the fiat ponzi scheme? With everything i have researched it seems they are riding the fiat paper pony until they beat it to death and try fitting us with some even larger BS global system that benefits only the minority. Do these guys really have the world in their pocket or will we see an alternate economic system rise in the BRIC countries?

I live near the gulf. The Corexit has made it's way into the tap water. I feel a little incapacitated but I also feel pumped. Like I felt years ago when I was cycling Androstenedione sans the aggression. Weird... Veins bulging, muscle striations, with no time swim/bike/running over the last 6 months.

Rumors abound about Germany/Russia creating a joint currency. Germany needs the huge commodities of Russia, Russia needs German factorys/technology built in Russia. Russia has already stated that they want to sell their natural recources for gold or a gold backed currency...not dollars. The game is on.

Germany is waiting to see how the Euro currency games play out plus their citizens do not want to bail out the PIIGS.

Russia/China are accumulating gold and will push for a new SDR backed partially by gold/silver later this year. Hide and watch.

Taking money from your left pocket and putting it in your right pocket - then declaring how much more rich you are, is an exercise in insanity.

How much longer can this insanity go on? Sooner or later somethings got to give. Just what that 'something' is - I have no idea. Anyone with some good inklings of what brings this ultimate ponzi scheme down? And what of the consequences? I have a nasty feeling that "Joe Sixpack" and the rest of the taxpayers get it in the neck - AGAIN!

Social, political, and economic capital are all flowing in the same manner (multiple ponzi schemes spinning at the same time so that there is no stopping and accounting). If any of these types of capital stop, the whole system will crash because the insolvency will be viewable to the masses and they will not be able to solicit participation any more. The three types of capital are being injected in multiple places through out the system so as to not be noticed, but the effect is to keep the system flowing until balance sheets can somehow be repaired, or at least to attenuate the fields where these capitals are deployed so that there is room for more landings and fewer messo and micro crashes. With fewer messo and micro crashes, there may not be outright global or sovereign crashes. I am beginning to wonder if this can go on for a long time. I see a system spinning faster and faster with resources draining off.

The game is to avoid a legitimation crisis (a la Jurgen Habermas, with hints of Max Weber [and perhaps some essence of Bourdieu?]).

If the economic capital comes into question = disbelief in the value of the currency.

If the political capital comes into question = disbelief in the efficacy of our government. We don't believe in the system or the individuals representing us. We determine it is fake.

If social capital comes into question = disbelief in the culture itself. We distrust media, television "programming," religion, the academy, all of the less formal ways that "status" happens.

All these capitals are in the process of being covertly hyperinflated after a fashion, thus watering down their value. And it is being done to keep the system from crashing.

Thinking out loud about something I am seeing in my head and feeling in my gut. They may get away with it for a while yet, but each of the capitals supporting the others are coming into question.

I keep wondering, what are these people thinking? I'm referring to those in positions of power and influence in the financial system (both public and private). They may be morally corrupt, insanely greedy, liars, manipulators, so on and so on... but very few get to these levels without enough brainpower and education to know that any deteriorating process must eventually end, and no scheme of obfuscation can continue to infinity. So again, what are they thinking? What drives them on day after day when they must know that eventual failure is built into their plans?

Some, I suspect, are like deer in the headlights and keep on doing what they do because they can't see anything else to do. This requires a rigidly compartmentalized mind that can shove any concept of failure in a dark closet and lock the door. They have no Plan B (and are unaware of that fact also).

Some may believe their accumulated wealth, property, and network of powerful connections will provide their own safe, comfortable Shangri-La even after the world's economies have gone into rigor mortis. Hint: night of the long knives.

The rest, possibly including well-meaning if deluded people at high political levels, have bet everything on The Recovery. Real growth will accelerate, people will have good jobs and money to spend, and all the overwound schemes will be unwound as if they never were. Like the deeply religious that ignore worldly suffering in anticipation of the Rapture, they believe what they must because there is no bearable alternative. Unfortunately if they have bet wrong, we will all be Left Behind.

Not in any crisis situation. The change would require months to years to effect. Like it or not, the USD is the only place where big money can go with liquidity and relative safety. We are the last domino.

There's a new kid in town. Well, an old kid actually; been around for thousands of years kickin' it, not to mention soundly trouncing your precious paper for the last decade. 'Round 2008' your precious won, just. And it didn't last. 'Round 2010' is on, and the crowd is showing signs of waking up; it could be gettin' close to finale. "Bonne Chance!" - Charles de Gaulle (well, I'm pretty sure he said that at some point in the sixties while unloading crates of US gold)

One more thing - this is not news. Even Bill Gross of PIMCO figured this out:

Here’s the problem that the U.S. Fed’s “exit” poses in simple English: Our fiscal 2009 deficit totaled nearly 12% of GDP and required over $1.5 trillion of new debt to finance it. The Chinese bought a little ($100 billion) of that, other sovereign wealth funds bought some more, but as shown in Chart 2, foreign investors as a group bought only 20% of the total – perhaps $300 billion or so. The balance over the past 12 months was substantially purchased by the Federal Reserve. Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought – you guessed it – Treasuries with the proceeds. The conclusion of this fairytale is that the government got to run up a 1.5 trillion dollar deficit, didn’t have to sell much of it to private investors, and lived happily ever – ever – well, not ever after, but certainly in 2009.

Does anyone think the economy might be better off with higher interest rates putting interest income into people's pockets? Or is the elimination of interest income part of the redistribution of wealth from "richer" to "poorer?"

I have been trying to figure out how we can be seeing bonds rally along with stocks rallying, along with fund outflows. These conditions only made sense to me if there was stealth QE.

What you point out is that the FED set up a whole new stealth facility to allow it to continue QE while publicly proclaiming it had ended it's program. It simply filled up a cash pot of "excess reserves" which it gave to banks for free to lend back to itself at low interest, and now is "encouraging" banks to lend it to buy UST for higher returns.

I suppose this system will allow the FED to infuse another Trillion USD into the system as it moves all excess reserves into bonds and, via trickle-down, into stocks, before it has to consider another round of QE.

Looked at from this perspective, my investment horizon for shorting the S&P and generally preparing for systemic collapse has been revised.

I don't know all the details of CRR & CAR calculations for banks, but I think banks could buy an awful lot of UST without effecting their reserve positions a lot. Maybe I'm playing catch-up to long-time readers of ZH, but what a twisted plan: taxpayer bails out banks, banks bail out the Treasury, the Country marches down a debt death-spiral. Gold anyone?

TD says: "Is it that much of a stretch to posit that the Fed reached an agreement with them whereby the banks would take over where the Fed left off?

I don't think it is a stretch at all. The opening gambit of QE 2 will be a subtle but significant change in the language. It will not be "Zirp for the indefinite future" it will be "Zirp for a period not less than 24 months.

Therefore anyone who was concerned with a possible rise in interest rates could say, "Hell with it, we borrow short term, we borrow big". There is no risk.

I think this policy has been in place on the QT for at least six months. I think the fed and treasury made sure the banks understood they could borrow short and lend long. It was a wink and a nod.

So if you have a "sure thing" what do you do with it? You buy fixed coupon paper. That means state munis and medium term Govvies. And that takes you back to this piece. Zirp is a money machine with no risk for the banks. The Treasury has unlimited buyers. A perfect marriage. For now.

In latin America we used to call this the Bicicleta. One could ride a bike from place to place with pieces of paper (that had no value) and at each stop made more money.